2019 (5) TMI 174 - AT - Income Tax

TP Adjustment - MAM selection - benchmarking the sales to AEs. - Internal CUP method OR TNMM - HELD THAT - Decision on the cross appeal for the assessment year 2007-08 2019 (2) TMI 1613 - ITAT AHMEDABAD will apply mutatis mutandis on this appeal as well. There are some variations in this year, such as the advance payment in this year is for 13.97 months on an average, as evident from the calculations and such as the fact that there have no sales of certain products to non AEs at all and yet internal CUP mechanism has been adopted. These variations will, however, not have any impact on the conclusions arrived at by us. We, therefore, see no reasons to take any other view of the matter for this assessment year. In any case, that approach is not even disputed by the parties before us. We, therefore, uphold the plea of the assessee and delete the impugned ALP adjustment which was made by adopting Internal CUP method and rejecting the TNMM adopted by the assessee for benchmarking the sales to AEs. Once we hold so, all other issues raised in the appeal are rendered infructuous calling for no adjudication by us.

Issues Involved:
1. Confirmation of addition under Section 92 of the Income Tax Act.
2. Rejection of Transactional Net Margin Method (TNMM) as the most appropriate method.
3. Adoption of Comparable Uncontrolled Price (CUP) method as the most appropriate method.
4. Denial of comparability adjustments for differences in contractual terms, commercial circumstances, functions, risks, and other economic factors.
5. Notional increase in sales realization for establishing comparability under CUP method.
6. Comparison of prices in US dollars instead of Indian rupees under CUP method.
7. Denial of benefit of arm's length price range of +/- 5% under proviso to Section 92C(2).
8. Exclusion of foreign exchange gain or loss as operating income for computation of operating margin.
9. Initiation of penalty proceedings under Section 274 r.w.s. 271(1)(c).

Detailed Analysis:

1. Confirmation of Addition Under Section 92:
The assessee challenged the correctness of the order confirming the addition of ?5,55,56,963 to its income concerning international transactions of chemical products with its Associated Enterprises (AEs). The Tribunal noted that the Transfer Pricing Officer (TPO) had rejected the Transactional Net Margin Method (TNMM) and adopted the Comparable Uncontrolled Price (CUP) method, leading to the addition.

2. Rejection of TNMM:
The TPO rejected the TNMM approach adopted by the assessee, which had been used in previous years. The Tribunal observed that the TPO failed to provide specific reasons for rejecting the TNMM and did not address the assessee's explanations regarding cost allocations and segmental details.

3. Adoption of CUP Method:
The Tribunal emphasized that while direct methods like CUP generally have an edge over indirect methods like TNMM, the selection of the most appropriate method must consider the availability, coverage, and reliability of data. The Tribunal found that the TPO's application of the CUP method was flawed as it relied on average prices rather than specific comparable uncontrolled transactions and did not account for significant differences in economic circumstances and contractual terms.

4. Denial of Comparability Adjustments:
The Tribunal noted that the CIT(A) rejected the assessee's request for adjustments for differences in business volume, advance payments, marketing and selling expenses, credit risk, and interest-free ECB loans. The Tribunal found that these differences significantly impacted the comparability of transactions and should have been considered.

5. Notional Increase in Sales Realization:
The Tribunal rejected the TPO's approach of notionally increasing sales realization by 10% for establishing comparability under the CUP method. The Tribunal found that such adjustments were not justified given the significant differences in the economic circumstances of the transactions.

6. Comparison of Prices in US Dollars:
The Tribunal found that comparing prices in US dollars instead of Indian rupees was inappropriate as it did not account for the differences in the economic environment and currency fluctuations.

7. Denial of Arm's Length Price Range:
The Tribunal held that the CIT(A) erred in not allowing the benefit of the arm's length price range of +/- 5% provided under the proviso to Section 92C(2). The Tribunal emphasized that this range should be considered while making transfer pricing adjustments.

8. Exclusion of Foreign Exchange Gain or Loss:
The Tribunal noted that the CIT(A) did not consider the foreign exchange gain or loss arising from business transactions as operating income for computing the operating margin. The Tribunal found this exclusion to be incorrect.

9. Initiation of Penalty Proceedings:
The Tribunal observed that the CIT(A) erred in not quashing the initiation of penalty proceedings under Section 274 r.w.s. 271(1)(c). The Tribunal held that the penalty proceedings were not justified given the facts and circumstances of the case.

Conclusion:
The Tribunal allowed the appeal, holding that the application of the CUP method was not justified due to significant differences in economic circumstances and contractual terms. The Tribunal upheld the use of the TNMM method adopted by the assessee and deleted the impugned ALP adjustment. Consequently, all other issues raised in the appeal were rendered infructuous.

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